2016 4Q Grandeur Peak Quarterly Letter

2016 4q Grandeur Peak Quarterly Letter-Free PDF

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Grandeur Peak Global Advisors,136 South Main Street. Salt Lake City UT 84101,January 15 2017,Market Commentary. In our last quarterly letter we touched on the concept of passive vs active management but mostly with regard. to the S P 500 This quarter we d like to bring up a more philosophical argument on the merits of active. management You see we re not convinced that Passive investing per se really exists First of all every. investor that wants to engage in passive investing must first decide in which index to invest The website. ETF com lists 1 955 different Index Funds that an investor can buy Of those 1 371 are based on Equity. Indexes and you can narrow it down to 1 185 if you exclude the leveraged and inverse ETFs Granted many. of those ETFs are based on the same underlying index but nevertheless deciding which Index Funds to buy is. certainly not a passive decision, But even more importantly in our view Index Funds are merely second derivative manifestations of Active. Management How do Index Funds decide which stocks to hold and at what weight to hold them They. match the weighting of their portfolio holdings to that of the index they are tracking But that weighting is in. reality determined by active managers A stock s weighting in any given index is determined depending on. the particular index construction rules by its market capitalization valuation dividend yield sector. geography beta price volatility or some other characteristic related to its quality or momentum All these. characteristics are determined by investment analysts portfolio managers and traders Index Funds don t set. prices they only accept the prices that active investors have already set. This is an example of the Free Rider Problem In economics the Free Rider Problem occurs when people are. able to take advantage of a collective benefit without having to pay for it like when I listen to National Public. Radio only when they re not running their fundraising campaigns According to economic theory the free. rider problem arises in a market in which supply is not diminished by the number of people consuming it and. consumption cannot be restricted Which begs the question what happens to the stock market when 100 of. investors are only buying Index Funds, But the most important aspect of active management at least for Grandeur Peak Global Advisors is the. relationships we establish with both the companies we invest in and with our clients When was the last time. you had a conversation with your Index Fund provider When s the last time they had a conversation with the. management teams of the companies they hold, Because we are invested right alongside our clients as fellow shareholders of our funds when we meet with.
company management we are establishing a direct link between our own personal capital and the managers. that will ultimately determine how that capital is put to work This is a very powerful concept with regard to. our fiduciary responsibility and the concept of Agency Theory. In an Agency relationship the Agent makes decisions and acts on behalf of the Principal Grandeur Peak. Advisors acts as an agent on behalf of our clients and shareholders who are the principals in our relationship. But with regard to the companies we invest in the company s management is the agent acting on behalf of us. Grandeur Peak and our shareholders as principals The main challenge of agency relationships is reconciling. two distinct sets of personal goals those of the Agent and those of the Principal Because meeting the. principal s goals is the primary function of the relationship it is vital that information be shared freely and. openly between the two parties so agents are always clear on their principals priorities and principals are. always aware of their agents decisions and actions. How do company management teams Agents understand the goals of their shareholders Principals if their. only shareholders are index funds How do Financial Planners Principals communicate their goals to their. Investment Mutual Fund Managers Agents if they only buy Index Funds In a world dominated by Robo. advisors and Index Funds the Principal Agent relationship breaks down and the management teams of the. world s companies are left alone to maximize their own personal goals. Past performance does not guarantee future results 2 of 20. Grandeur Peak Global Advisors,136 South Main Street. Salt Lake City UT 84101, Our combined global portfolio experienced three primary headwinds this quarter A US underweight during. a strong US stock market an EM overweight during weak stock performance in Emerging Markets and an. overweight in India during a period of unexpected changes in monetary policy In addition our stocks. underperformed their respective benchmarks across almost all our sectors Given the huge post election. rally across the regional banks in the US and the lower quality segment of the US market the Russell 2000. Value Index was up 14 in the quarter we re not surprised that our US names didn t keep up. Meanwhile with the continued strengthening of the US Dollar and the ongoing outflow of money from. Emerging Markets our Emerging Markets names underperformed other markets Finally we ve had an. outsized position in India and the market felt the effect of the cash crunch resulting from President Modi s. demonetization policy which hit a few of our Indian holdings particularly hard While we agree with the. direction towards more financial transparency the country as a whole struggled over the near term as it s a. heavy cash based economy, The quarter included many notable macro events the US elections India s demonetization announcement. and the change in policy at the Organization of the Petroleum Exporting Countries OPEC and Federal. Open Market Committee FOMC meetings As global investors we constantly face both known macro. events with unpredictable outcomes and also unknown events Do we change our investment criteria the. day following a known event with an unexpected outcome No As Warren Buffett commented in a CNN. interview following the election he stated that he was buying and selling the same stocks in the same. quantities both before and after the election We take a similar path at Grandeur Peak We seek to find the. highest quality companies at the most reasonable price which can grow earnings somewhat regardless of. the macro environment A high quality company should be able to benefit in a favorable economic. environment and be able to weather any downturn Their long term prospects rarely change overnight due. to a macro event even though stock prices may be quite volatile This is a great defense and opportunity. against the unforeseeable market outcomes We certainly don t mean to justify our underperformance this. quarter but we continue to like our portfolio and the growth prospects of our companies for the longer. term Of course in hindsight we can always recognize places to improve as well. Fund Attribution and Commentaries,Global Opportunities Fund. Total Attribution Excess Return 1 2 63,Sector Selection 2 89.
Sector Allocation 0 09,Currency 0 19, Relative Relative Excess Return Relative Relative Excess Return. Sector Weight Performance Contribution Region Weight Performance Contribution. Consumer Discretionary 0 2 4 0 0 60 Africa ME 0 8 0 1 0 01. Consumer Staples 1 6 6 0 0 16 Asia Pacific 0 8 2 0 0 56. Energy 2 3 7 7 0 41 Central Asia 6 3 4 0 0 89, Financials 7 7 12 5 1 49 Eastern Europe 0 2 1 7 0 04. Healthcare 3 6 3 6 0 26 North America 17 2 0 4 1 17. Industrials 2 0 1 1 0 13 South America 0 5 4 1 0 09. Tech 6 2 0 5 0 09 Western Europe 8 1 1 1 0 11,Materials 7 2 3 5 0 05 Cash 2 6 0 0 0 00. Real Estate 7 0 5 5 0 11,Utilities Telecom 3 8 1 9 0 07. Cash 2 2 0 0 0 00,Other 0 00,TOTAL CONTRIBUTION 2 63.
Data from 09 30 16 12 31 16,Benchmark Russell Global Small Cap Index. Gross of fees and expenses, Past performance does not guarantee future results 3 of 20. Grandeur Peak Global Advisors,136 South Main Street. Salt Lake City UT 84101, Past performance does not guarantee future results. Top Contributors, For the 4th quarter of 2016 our top five contributors to performance of the Global Opportunities Fund.
First Republic Bank Regional Banks United States up 19 7 contributed 44 basis points to. the excess return of the fund, Knight Transportation Inc Trucking United States up 15 4 contributed 27 basis points to. the excess return of the fund, Man Wah Holdings Ltd Home Furnishings Hong Kong up 8 4 contributed 20 basis points. to the excess return of the fund, Power Integrations Inc Semiconductors United States up 7 9 contributed 20 basis points to. the excess return of the fund, Home Bancshares Inc Regional Banks United States up 33 9 contributed 17 basis points to. the excess return of the fund,Top Detractors, For the 4th quarter of 2016 our top five detractors from performance of the Global Opportunities Fund.
Divi s Laboratories Ltd Life Sciences India down 40 5 detracted 34 basis points from the. excess return of the fund, Trancom Co Ltd Trucking Japan down 21 5 detracted 24 basis points from the excess. return of the fund, Security Bank Corp Diversified Banks Philippines down 22 8 detracted 22 basis points. from the excess return of the fund, Value Partners Group Ltd Asset Management Hong Kong down 22 6 detracted 19 basis. points from the excess return of the fund, Bajaj Finance Ltd Consumer Finance India down 21 8 detracted 17 basis points from the. excess return of the fund, The Global Opportunities Fund underperformed this quarter primarily due to our underperformance in the.
US especially across our Financials holdings For example our Regional Banks performed well but failed. to keep up with a huge rally in US Regional Bank shares Our Financials exposure is diversified across the. globe and much broader across sub industries This led to substantial underperformance against the. benchmark in our Financials sector Our Healthcare holdings an overweight sector for us were able to. outperform the benchmark but the sector still had negative absolute performance highlighting how tough. the quarter was across the board for us We were overweight a tough sector even though our stocks handily. outperformed the benchmark On the positive side sectors with individual winners were Semiconductors. and Trucking, We do question how long a US rally can continue and wouldn t be surprised to see some of the exuberance. taper off in the coming year However if both corporate and individual tax cuts materialize and Mr. Trump s professed protectionism isn t strongly enforced the US markets could continue to benefit. The portfolio continues to be overweight Emerging Markets which was a benefit for the year but hurt our. performance in the fourth quarter The biggest hit to our relative performance came from our Indian. holdings The weakness of the Indian market was punctuated by poor results from some of our individual. holdings specifically in the Financials sector The Philippines Indonesia Taiwan and Vietnam were all. detractors as well South Korea moved in our favor as our underweight shielded us from the market. reaction to President Park s impeachment Eastern Europe has been positive as the region transitions from. local to globally driven economies over the long term. We think our structure and process still give us a competitive advantage in being able to identify and own. quality smaller companies As the world moves towards a more passive stance this task becomes even. Past performance does not guarantee future results 4 of 20. Grandeur Peak Global Advisors,136 South Main Street. Salt Lake City UT 84101,International Opportunities Fund. Total Attribution Excess Return 2 0 58,Sector Selection 1 65. Sector Allocation 0 62,Currency 1 71, Relative Relative Excess Return Relative Relative Excess Return.
Sector Weight Performance Contribution Region Weight Performance Contribution. Consumer Discretionary 5 1 0 4 0 15 Africa ME 1 2 1 2 0 04. Consumer Staples 3 7 6 8 0 04 Asia Pacific 12 6 2 1 0 28. Energy 2 3 3 0 0 29 Central Asia 4 3 0 8 0 42, Financials 8 8 6 5 1 08 Eastern Europe 0 7 1 0 0 00. Healthcare 4 8 4 6 0 07 North America 2 8 2 8 0 19. Industrials 1 5 1 5 0 29 South America 0 1 2 6 0 07. Tech 6 2 1 9 0 01 Western Europe 1 8 0 2 0 04,Materials 9 0 1 7 0 30 Cash 8 5 0 0 0 00. Real Estate 6 7 0 6 0 49,Utilities Telecom 3 0 4 2 0 11. Cash 8 5 0 0 0 00,Other 0 01,TOTAL CONTRIBUTION 0 58. Data from 09 30 16 12 31 16,Benchmark Russell Global ex US Small Cap Index.
Past performance does not guarantee future results. Top Contributors, For the 4th quarter of 2016 our top five contributors to performance of the International Opportunities. M A Capital Partners Co Investment Banking Japan up 28 4 contributed 24 basis points. to the excess return of the fund, Man Wah Holdings Ltd Home Furnishings Hong Kong up 8 36 contributed 17 basis points. to the excess return of the fund, Tethys Oil Ab Oil Gas Oman up 28 7 contributed 13 basis points to the excess return of. TFI International Inc Trucking Canada up 26 5 contributed 11 basis points to the excess. return of the fund, Skandiabanken Asa Diversified Banks Norway up 10 6 contributed 11 basis points to the. excess return of the fund,Top Detractors, For the 4th quarter of 2016 our top five detractors from performance of the International Opportunities.
Advisor may absorb certain Fund expenses without which total retu rn would have been lower Investment returns and principal value will fluctuate and shares when redeemed may be worth more or less than their original cost Total Expense Ratios Gross 1 30 Net 1 30 for GPRIX Gross 1 55 Net 1 55 for GPROX Gross 1 38 Net 1 38 for GPGIX Gross 1 63 Net 1 63 for GPGOX Gross 1

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